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Flashbacks and Forecasts: Sony in 2016

As the inventor of the Sony Walkman and maker of the world’s current most popular game console, Sony devices have enjoyed huge popularity over the years. But electronic devices haven’t been the core of Sony’s business for a long time and it is now crunch time for Sony Mobile, the most problematic of all Sony’s holdings. The stakes couldn’t be higher either: if worse comes to worse this year, 2017 will be the year that Sony Mobile goes up for sale.

Sony has been in the midst of a multi-year “restructuring” plan ever since its current president Kazuo Hirai was appointed back in 2012. Cost-cutting and profit optimization is the name of the game and changes to this effect have steadily been making their way through the Sony Group’s businesses: Sony Electronics, Sony Music, Sony Pictures and Sony Mobile.

In 2015, Sony Mobile was given a clear mandate: get back to profitability by the end of 2016 or face the consequences.

At the end of 2014, a new Sony Mobile chief was appointed, Hiroki Totoki, and Hirai gave the new CEO a clear mandate: get the mobile division back to profitability by the end of 2016 or face the consequences. Considering Sony had already sold off its computer division in 2014, the seriousness of the task ahead was clear.

While the larger Sony Group has become more profitable in recent years thanks to Hirai’s streamlining changes – even as overall revenue has remained relatively flat – Sony Mobile is among the last divisions to be overhauled. The lack of attention being paid to mobile is evident in the number of often embarrassing problems the division has faced in recent times.

The curse of the 810

With the late 2014 Sony Pictures email hack still causing problems, the last thing Sony needed in 2015 was another scandal, but one arrived regardless. Sony’s first major device of the year, the Xperia Z3+, got widespread attention for overheating and camera crashes. The Snapdragon 810 chipset – the bane of many flagship phones in 2015 – was largely responsible, affecting the LG G Flex 2, Xperia Z3+ and HTC One M9 in the first few months of the year.

Sony's first major device of the year, the Xperia Z3+, got widespread attention for overheating and camera crashes.

When using AR Mode or 4K video on the Xperia Z3+, the app would crash after just a few seconds and the phone would need to be left to cool down before the camera could be restarted. Sony put out patches but failed to solve the problem. Considering the tough times Sony had been facing, the last thing Sony needed was a flagship phone with heavily publicized faults.

Thanks to its foolhardy six-month update cycle, Sony had long been accused of releasing new flagship phones that were only incremental updates from the last. The Xperia Z3 had been widely viewed as a very marginal update on the Z2, with the same camera, same amount of RAM, screen size and resolution but a smaller battery.

One, two, miss a few

As if performance and specs scandals weren’t bad enough, Sony also couldn’t seem to name anything logically. The Xperia Z4 Tablet arrived at CES when there was no Xperia Z4 phone. When the phone did arrive it was called the Xperia Z4 in Japan, the Xperia Z3+ internationally and the Xperia Z4v in the U.S.. The negative response to the Z4 in Japan was generally accepted as the reason for renaming the device internationally.

The naming confusion only got worse though. The Z3 Compact hit shelves in early 2015 as the successor to the Z1 Compact and was itself succeeded by the Z5 Compact later in the year. No one seemed to know what Sony was thinking and the company just seemed to make one bad decision after another.

Never say “never ever”

With the mobile division’s long-standing troubles only getting worse, rumors circulated in the middle of 2015 that Sony Mobile was going to be sold off. CEO Totoki struck back definitively, saying “we will never ever sell or exit from the current mobile market”. But Sony was hemorrhaging fans and Xperia sales in 2015 were the lowest they have been since 2011.

Against this backdrop it should come as no surprise that a little later in the year, Sony president Hirai was quoted as saying “we will continue with the business as long as we are on track with the scenario of breaking even next year onwards. Otherwise, we haven’t eliminated the consideration of alternative options.”

“We will continue with the business as long as we are on track with the scenario of breaking even next year onwards. Otherwise, we haven't eliminated the consideration of alternative options.”

While Sony Mobile was being given every opportunity to turn things around, Hirai’s attitude was clearly that of a sober businessman committed to improving the profitability of his stable of companies. And when you look at the facts, Sony Mobile hasn’t been making money for years, just as Samsung Mobile has become a constant drain on Samsung’s other more profitable divisions.

Sony Music, Sony Pictures and Sony Electronics have been picking up the slack for Sony Mobile for a long time. The new Bond film “Spectre”, Adele’s record-breaking album “25,” brisk camera sensor sales, and Playstation 4 sales that broke the 30 million unit ceiling within two years of launch are what made Sony money in 2015, not Xperia devices.

Time to face the music

Like all other Android OEMs, a plateauing smartphone market, flatlining tablet market and increased competition from abroad are taking their toll. Even in Japan, Sony’s market share is only 17.5% and in the U.S. it’s around 1%. Despite a slight upswing in Xperia sales in the last quarter of 2015, Sony Mobile’s revenue was down 15% over the year prior.

While Sony executives have claimed Sony Mobile is on target for a return to profitability in 2016, the company’s most recent earnings call reported a “significantly deteriorated device segment”, going on to report “every other segment had an increase in operating profit”. In fact, even with Sony Mobile’s poor performance, Sony as a whole reported its highest Q3 profit in eight years (Sony’s financial year ends in March 2016, making the Oct-Dec quarter Q3).

Sony is only expecting to ship 3.5 million units this quarter – less than half that shipped in the previous quarter.

The earnings call also contained yet another re-adjustment of forecasted Xperia shipments for the full financial year. The figure once stood at 30 million, was then revised to 27 million and has now been further reduced to 25 million.

Considering Sony has already shipped 21.5 million devices, this means Sony is only expecting to ship 3.5 million units this quarter based on its own data – less than half that shipped in the previous quarter.

You may be wondering how figures like these will ever get the division back to making a profit by the end of 2016. The thing is, they won’t. Sony Mobile’s turnaround, like the rest of Sony’s restructuring, isn’t predicated on an increase in revenue. Rather, Hirai’s cost-cutting, streamlining and downsizing is what’s responsible for making each Sony division more profitable, not an increased market share.

Sony in 2016

So what does this all mean for 2016? Basically, Sony Mobile is in a race for its life. With 2015 sales of just 29.4 million devices, the lowest since 2011, it’s a sad day when it must be admitted that Sony is better off without Sony Mobile. Unless Sony can turn things around in the next twelve months the Xperia brand will go the way of Vaio before it.

It’s hard to say how far along Hirai’s restructuring plan is within the division though. While Xperia sales may not be going anywhere, if Hirai’s streamlining and profit maximizing works as well at Sony Mobile as it seems to have done throughout the rest of the company, there might still be hope left. But even if Sony Mobile sees a return to profitability through jobs cuts and other strategies, it needs to prove its value, not simply stop hemorrhaging money.

With 2015 sales of just 29.4 million devices, the lowest since 2011, it's a sad day when it must be admitted that Sony is better off without Sony Mobile.

Opportunities and challenges ahead

Looking at Sony’s other divisions, Sony Electronics has the world’s most popular gaming console on its hands in the Playstation 4, with PS VR still to come this year. Both Sony Music and Sony Pictures are doing well and Sony’s Financial Services business is by far the most profitable of all of Sony’s holdings, generating more than half of the revenue and operating profit for the entire company.

The Xperia Z5 and Xperia Z5 Compact are set to hit the U.S. market on February 8 and with a little luck, the various fiascos of 2015 will be forgotten in light of the generally positive reviews the Z5 series has garnered internationally. An outstanding camera and excellent battery life will hopefully be enough to make up for a debatable waterproof rating, too-familiar design language and interface that’s long overdue for an update.

It's likely that Xperia tablets will stop being produced in 2016 and Sony will end its six-monthly product cycle.

It’s likely that Xperia tablets will stop being produced in 2016 and Sony’s Smartwatch efforts may begin to taper off too. Sony will likely soon make it official that it is ending its six-monthly product cycle with the Xperia Z6 due for an IFA-release in September rather than its traditional timeframe of MWC 2016 later this month.

Apart from the unnecessary expense of developing and testing two flagships a year, Sony can’t afford any more bad publicity about incremental improvements. The U.S. public hasn’t seen a flagship Xperia product on shelves since the Xperia Z3 and the Xperia Z5 has already received some bad press over the loss of the finger scanner.

The forecast

If Sony Mobile gets sold, the result would be a more profitable and stable Sony Group that is known around the world for providing excellent financial services rather than for creating game-changing tech devices. Even if Sony Mobile manages to return to profitability this year, cost-cutting and profit maximization won’t be enough forever.

Sony Mobile needs to re-imagine its wireless portfolio, cutting high investment, low-return areas to remain as profitable as possible. The Xperia range needs to be revitalized in terms of design and interface and the company can’t afford any more high-profile scandals or missteps. The Xperia Z5 series, as good as it is, is faced with the ominous task of keeping the company afloat throughout 2016 if Sony Mobile is going to survive long enough to take the Xperia Z6 to market.

Kris Carlon is a Senior Editor at Android Authority. He is a half-British Australian who lives in Berlin, travels a lot and is always connected to a laptop, phone, smartwatch or tablet (and occasionally a book).